September 15, 1971
Observers in this District are in general agreement that 1972 will see a substantial 5 to 6 percent rise in real output, with some abatement of the rate of price inflation. These views have been strengthened by the President's program. All evidence available to us indicates that business firms, labor unions, and state and local governments are cooperating with the "letter and spirit" of the wage-price freeze. Limited information provided by retailers indicates that sales picked up after mid-August. New hirings have not accelerated, but layoffs are less frequent than was the case last spring.
Many employees have been promised increases in compensation to be effective as soon as the control is removed. Moreover, there is strong dissatisfaction with the price freeze on the part of manufacturers that had planned price increases, after having previously granted wage increases.
The proposed reenactment of the investment tax credit is very popular with both producers and purchasers of capital goods. There was no immediate, discernible impact, however, on orders for new equipment. Large firms that always have a "shelf" of investment projects are reexamining marginal situations. But there is concern that the Congress will cancel the Treasury's liberalized depreciation rules, which are believed to be about as important as the investment tax credit as a stimulus to capital outlays.
The import surcharge, and devaluation of the dollar, may deter imports of finished capital goods. However, some foreign components (such as ball bearings from Japan) have been selling at prices 30 to 40 percent below prices of domestic counterparts. The deterrent to auto imports will be minimized because the two principal domestic subcompacts are now being produced at capacity. Imports from the Orient now hold virtually the entire domestic market for smaller consumer electronic products, including TV sets with screens under 16 inches. These markets are not expected to be recaptured, but inroads in other product lines may be slowed. Imports of small washers and refrigerators, which have become significant this year, face no domestic competition at present.
Employers hope that a guideline framework will help hold down increases in worker compensation in post-freeze negotiations, from the recent standard of 10 percent or more annually, to perhaps 6 percent. The continuing ample supply of people seeking work will tend to aid such negotiations.
One result of the wage-price freeze has been a near blackout on publicity on price developments—up or down. Some businesses suggest that price discounting will be restricted to compensate for inability to raise prices of other products.
Sales of domestically produced major appliances are running about 5 percent above last year with the margin of gain widening. Purchases of these items appear to be related to the rising number of house completions. Demand for furniture has been excellent in recent months.
Steel producers are experiencing a somewhat more rapid pickup in
orders than had been expected a month ago. Auto firms now expect to
be ordering steel on a normal basis in November, rather than in
early 1972. Inventories of steel are "unbalanced" in some cases.
About two thirds of the
strike-hedge steel inventory is expected to
be used up by the end of September.
Residential construction continues to boom, with the Chicago area especially strong. Mobile home output is at capacity. Existing homes are selling readily. Contracts for new commercial and industrial structures, however, are down sharply with no revival in sight. Public construction activity is rising. Work has started again on a large Federal office building in Chicago. Foundations of this building were completed in 1968.
Inflows of savings to commercial banks continue at a reduced level. Checks with large District banks show no significant pickup in business loan demand following the rise in commitments noted in recent months.